JJB warns on profits as itis forced to slash prices

JJB Sports, the beleaguered sports equipment retailer, yesterday warned that profits margins were being hit by its hefty price cutting, as it posted a rise in debts and slowdown in underlying sales growth.

The profit warning spooked City analysts, who warned of downgrades on full-year losses and the "increased likelihood" that JJB would need to raise additional funds.

JJB – which nearly collapsed last year – reported an 11.5 per cent rise in underlying sales between 2 August and 7 November, compared to growth of 13.4 per cent for the year to date. This year's sales were flattered by JJB's crippling stock shortages in 2009.

The sports equipment chain said that its gross margin – the difference between the price at which a retailer buys stock and the price it sells it for – had been "significantly affected by promotional activity" and came in at 33.8 per cent from 27 September to 7 November.

Given that JJB's profit warning was unscheduled, there was no direct comparison for gross margins last year. But margins were 42.2 per cent for the half year to 1 August 2010, while it was 46 per cent for the 20 weeks to 13 December 2009.

Peter Smedley, an analyst at Charles Stanley, said: "The profit warning driven by JJB's highly promotional discounting stance will mean that existing consensus estimates for full-year losses before tax of between £30m to £33m will be revised sharply downwards."

The retailer's net debt position deteriorated by £1.1m to £16.6m as of 7 November, primarily due to increased stock purchases compared to last year.

Katharine Wynne, an analyst at Investec, said: "We expect downgrades and an increased likelihood of a fund raising, given the swing into debt in the period."

JJB said: "The board believes that current trading conditions are having and will continue to have a negative impact on its expectations for the full year."